Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and the results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2023 Form 10-K.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) contains forward-looking statements that are subject to risks and uncertainties. Refer to “Special Note Regarding Forward-Looking Statements and Market Data” below and Item 1A — Risk Factors in our 2023 Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements. MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, but not limited to, those listed in our 2023 Form 10-K.
The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended August 3, 2024, and a comparison to the three and six months ended July 29, 2023. The discussion related to cash flows for the six months ended July 29, 2023, has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended July 29, 2023, filed with the Securities and Exchange Commission (“SEC”) on September 7, 2023.
MD&A is a supplement to our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A is organized as follows:
Overview . This section provides a general description of our business, including our key value-driving strategies and an overview of certain known trends and uncertainties.
Basis of Presentation and Results of Operations . This section provides our condensed consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current period as compared to the prior year’s comparative period, as well as non-GAAP measures we use for financial and operational decision-making and as a means to evaluate period-to-period comparisons.
Liquidity and Capital Resources . This section provides an overview of our sources and uses of cash and our financing arrangements, including our credit facilities and debt arrangements, in addition to the cash requirements for our business, such as our capital expenditures.
Critical Accounting Policies and Estimates . This section discusses the accounting policies and estimates that involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, including the significant estimates and judgments used in the preparation of our condensed consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “short-term,” “non-recurring,” “one-time,” “unusual,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.
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Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. Matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may, in fact, may not be short term and may recur in one or more future financial reporting periods. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled Risk Factors in our 2023 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2024 and in our 2023 Form 10-K. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.
We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect, or that future developments affecting us will be those that we have anticipated. The forward-looking statements included in this quarterly report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We are a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Sourcebooks. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child and teen furnishings. Our retail business is fully integrated across our multiple channels of distribution. We position our Galleries as showrooms for our brand, while our websites and Sourcebooks act as virtual and print extensions of our physical spaces, respectively. We operate our retail locations throughout the United States and Canada as well as in the United Kingdom, Germany, Belgium and Spain and have an integrated RH Hospitality experience in 18 of our Design Gallery locations, which includes restaurants and wine bars.
We have recently undertaken efforts to introduce the most prolific collection of new products in our history, with a substantial number of new furniture and upholstery collections across RH Interiors, RH Contemporary, RH Modern, RH Outdoor, RH Baby & Child and RH TEEN. These new collections reflect a level of design and quality inaccessible in our current market, and a value proposition that we believe will be disruptive across multiple markets.
As of August 3, 2024, we operated the following number of locations:
COUNT
RH
Design Galleries
35
Legacy Galleries
33
Modern Gallery
1
Baby & Child and TEEN Galleries
3
Total Galleries
72
Outlets
39
Guesthouse
1
Waterworks Showrooms
14
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Business Conditions
While we experienced increased demand for our products during the pandemic, recently there have been significant shifts in consumer spending away from home furnishings. The demand for home furnishings has decreased since the reopening of the economy after the peak of the pandemic and consumption patterns have shifted into other areas, such as travel and leisure. Our business has also been negatively affected by macroeconomic conditions, including substantially higher interest rates and mortgage rates, volatility in the global financial markets and the slowdown in the luxury home market as well as other negative factors related to the effects of lingering higher inflation and increased costs, including higher construction expenses. Our expectation is that these factors, which have contributed to the slowdown in demand in our business, will moderate in the future when the housing market rebounds, and we believe we have positioned the business to take advantage of any improvements in macroeconomic factors.
Our decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors.
Strategic Initiatives
We are in the process of implementing a number of significant business initiatives that have had, and will continue to have, an impact on our results of operations. As a result of the number of current business initiatives we are pursuing, we have experienced in the past, and may experience in the future, significant period-to-period variability in our financial performance and results of operations. While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter. Delays in the rate of opening new Galleries and pursuit of our international expansion have resulted in delays in the corresponding increase in net revenues that we experience as new Design Galleries are introduced. In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives.
For more information, refer to the sections entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors in our 2023 Form 10-K.
Key Value-Driving Strategies
In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives:
Product Elevation . We believe we have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve strong revenues and margins. Our customers know our brand concepts as RH Interiors, RH Contemporary, RH Modern, RH Outdoor, RH Beach House, RH Ski House, RH Baby & Child, RH TEEN and Waterworks. Our strategy is to continue to elevate the design and quality of our product. With the launch of the RH Interiors and RH Contemporary Sourcebooks in 2023, as well as the launch of the RH Outdoor, RH Modern and RH Interiors Sourcebooks in 2024, we have begun the introduction of the most prolific collection of new products in our history. In addition, over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color.
Gallery Transformation . Our product is elevated and rendered more valuable by our architecturally inspiring Galleries. We believe our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion. We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries sized to the potential of each market and the size of our assortment. In addition, we plan to incorporate hospitality into many of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable. We believe hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of hospitality drives incremental sales of home furnishings in these Galleries.
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Brand Elevation . Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. We entered this industry with the opening of the RH Guesthouse New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen. In June 2023, we opened RH England, The Gallery at the Historic Aynho Park, a 400-year-old landmark estate representing the most inspiring and immersive physical expression of the brand to date. RH England marked the beginning of our global expansion beyond North America. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley; RH1 & RH2, our private jets; and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.
Global Expansion . We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that pursuit of global expansion will provide RH with a substantial opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues. Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, and brand of RH. As such, we are actively pursuing the expansion of the RH brand globally. Our plans include launching a number of international locations in the United Kingdom and Europe, which began with the opening of RH England in June 2023, followed by RH Munich and RH Düsseldorf in November 2023, RH Brussels in March 2024, and RH Madrid in June 2024. We have also secured a number of other locations in various markets in the United Kingdom, continental Europe and Australia, including in Paris, London, Milan and Sydney.
Digital Reimagination . Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally, our multiyear effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation. Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Launched in the spring of 2022, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable. We expect to continue to elevate the customer experience on The World of RH with further enhancements to content, navigation and search functionality. We believe an opportunity exists to create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a website can and should be.
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Basis of Presentation and Results of Operations
The following table sets forth our condensed consolidated statements of income:
THREE MONTHS ENDED
SIX MONTHS ENDED
AUGUST 3,
% OF NET
JULY 29,
% OF NET
AUGUST 3,
% OF NET
JULY 29,
% OF NET
2024
REVENUES
2023
REVENUES
2024
REVENUES
2023
REVENUES
(dollars in thousands)
Net revenues
$
829,655
100.0
%
$
800,479
100.0
%
$
1,556,615
100.0
%
$
1,539,641
100.0
%
Cost of goods sold
454,898
54.8
420,406
52.5
865,820
55.6
812,023
52.7
Gross profit
374,757
45.2
380,073
47.5
690,795
44.4
727,618
47.3
Selling, general and administrative expenses
278,630
33.6
228,733
28.6
540,005
34.7
477,038
31.0
Income from operations
96,127
11.6
151,340
18.9
150,790
9.7
250,580
16.3
Other expenses
Interest expense—net
59,262
7.2
44,422
5.5
116,034
7.5
84,238
5.5
Other (income) expense—net
(663)
(0.1)
(186)
—
502
—
(839)
(0.1)
Total other expenses
58,599
7.1
44,236
5.5
116,536
7.5
83,399
5.4
Income before taxes and equity method investments
37,528
4.5
107,104
13.4
34,254
2.2
167,181
10.9
Income tax expense
3,717
0.4
27,245
3.4
1,626
0.1
43,830
2.9
Income before equity method investments
33,811
4.1
79,859
10.0
32,628
2.1
123,351
8.0
Share of equity method investments loss—net
4,859
0.6
3,382
0.4
7,301
0.5
4,984
0.3
Net income
$
28,952
3.5
%
$
76,477
9.6
%
$
25,327
1.6
%
$
118,367
7.7
%
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures (collectively, “non-GAAP financial measures”). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision-making. The non-GAAP financial measures used by us in this Quarterly Report on Form 10-Q may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.
For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.
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Adjusted Operating Income . Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance .
Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income
THREE MONTHS ENDED
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
AUGUST 3,
JULY 29,
2024
2023
2024
2023
(in thousands)
Net income
$
28,952
$
76,477
$
25,327
$
118,367
Interest expense—net (1)
59,262
44,422
116,034
84,238
Other (income) expense—net (1)
(663)
(186)
502
(839)
Income tax expense (1)
3,717
27,245
1,626
43,830
Share of equity method investments loss—net (2)
4,859
3,382
7,301
4,984
Operating income
96,127
151,340
150,790
250,580
Legal settlements—net (3)
—
8,000
(9,375)
8,000
Non-cash compensation (4)
861
2,024
2,808
5,555
Reorganization related costs (5)
—
—
—
7,621
Adjusted operating income
$
96,988
$
161,364
$
144,223
$
271,756
(1) Refer to discussion “Three Months Ended August 3, 2024 Compared to Three Months Ended July 29, 2023” and “Six Months Ended August 3, 2024 Compared to Six Months Ended July 29, 2023” below for a discussion of our results of operations for the three and six months ended August 3, 2024 and July 29, 2023.
(2) Represents our proportionate share of the net loss of our equity method investments.
(3) The adjustment in the six months ended August 3, 2024 represents favorable legal settlements received of $10 million, partially offset by costs incurred in connection with one of the matters. The adjustments in the three and six months ended July 29, 2023 represent legal settlements associated with class action litigation matters.
(4) Represents the amortization of the non-cash compensation charge related to an option grant made to Mr. Friedman in October 2020.
(5) Represents severance costs and related payroll taxes associated with a reorganization.
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Adjusted Net Income . Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.
Reconciliation of GAAP Net Income to Adjusted Net Income
THREE MONTHS ENDED
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
AUGUST 3,
JULY 29,
2024
2023
2024
2023
(in thousands)
Net income
$
28,952
$
76,477
$
25,327
$
118,367
Adjustments pre-tax:
Legal settlements—net (1)
—
8,000
(9,375)
8,000
Non-cash compensation (1)
861
2,024
2,808
5,555
Reorganization related costs (1)
—
—
—
7,621
Subtotal adjusted items
861
10,024
(6,567)
21,176
Impact of income tax items (2)
(1,204)
(1,203)
76
(3,636)
Share of equity method investments loss—net (1)
4,859
3,382
7,301
4,984
Adjusted net income
$
33,468
$
88,680
$
26,137
$
140,891
(1) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.
(2) We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent. The adjustments for the three months ended August 3, 2024 and July 29, 2023 are based on adjusted tax rates of 12.8% and 24.3%, respectively. The adjustments for the six months ended August 3, 2024 and July 29, 2023 are based on adjusted tax rates of 5.6% and 25.2%, respectively.
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EBITDA and Adjusted EBITDA . EBITDA and adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance.
Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA
THREE MONTHS ENDED
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
AUGUST 3,
JULY 29,
2024
2023
2024
2023
(in thousands)
Net income
$
28,952
$
76,477
$
25,327
$
118,367
Depreciation and amortization
32,257
28,136
63,084
55,906
Interest expense—net
59,262
44,422
116,034
84,238
Income tax expense
3,717
27,245
1,626
43,830
EBITDA
124,188
176,280
206,071
302,341
Non-cash compensation (1)
11,529
8,538
22,073
18,718
Share of equity method investments loss—net (2)
4,859
3,382
7,301
4,984
Capitalized cloud computing amortization (3)
2,694
1,923
5,165
3,772
Other (income) expense—net (2)
(663)
(186)
502
(839)
Legal settlements—net (2)
—
8,000
(9,375)
8,000
Reorganization related costs (2)
—
—
—
7,621
Adjusted EBITDA
$
142,607
$
197,937
$
231,737
$
344,597
(1) Represents non-cash compensation related to equity awards granted to employees, including the amortization of the non-cash compensation charge related to an option grant made to Mr. Friedman in October 2020.
(2) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.
(3) Represents amortization associated with capitalized cloud computing costs.
Adjusted Capital Expenditures. We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.
Reconciliation of Adjusted Capital Expenditures
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Capital expenditures
$
115,340
$
81,596
Landlord assets under construction—net of tenant allowances
17,461
13,959
Adjusted capital expenditures
$
132,801
$
95,555
In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million for the six months ended July 29, 2023, which are reflected as a reduction to principal payments under finance lease agreements within financing activities on the condensed consolidated statements of cash flows. No such amounts were received from landlords during the six months ended August 3, 2024.
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The following table presents RH Gallery and Waterworks Showroom metrics, and excludes Outlets:
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
TOTAL LEASED
TOTAL LEASED
SELLING SQUARE
SELLING SQUARE
COUNT
FOOTAGE (1)
COUNT
FOOTAGE (1)
(square footage in thousands)
Beginning of period
84
1,378
81
1,286
RH Design Galleries:
Cleveland Design Gallery
1
33.1
—
—
Palo Alto Design Gallery
1
32.5
—
—
Brussels Design Gallery
1
27.7
—
—
Madrid Design Gallery
1
8.3
—
—
England Design Gallery
—
—
1
35.1
Indianapolis Design Gallery
—
—
(1)
(13.0)
RH Legacy Galleries:
Cleveland Legacy Gallery
(1)
(7.1)
—
—
Palo Alto Legacy Gallery
(1)
(6.1)
—
—
Indianapolis temporary Gallery
—
—
1
5.7
Detroit Legacy Gallery (relocation)
—
—
—
1.5
End of period
86
1,466
82
1,315
Total leased square footage at end of period (2)
2,020
1,791
(1) Leased selling square footage is retail space at our retail locations used to sell our products, as well as space for our restaurants and wine bars. Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops.
Leased selling square footage includes approximately 89,000 square feet as of August 3, 2024 related to three owned retail locations and 35,000 square feet as of July 29, 2023 related to one owned retail location.
(2) Total leased square footage includes approximately 142,000 square feet as of August 3, 2024 related to three owned retail locations and 56,000 square feet as of July 29, 2023 related to one owned retail location.
Weighted-average leased square footage and leased selling square footage are calculated based on the number of days a retail location was opened during the period divided by the total number of days in the period, and were as follows:
THREE MONTHS ENDED
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
AUGUST 3,
JULY 29,
2024
2023
2024
2023
(in thousands)
Weighted-average leased square footage
2,003
1,765
1,969
1,747
Weighted-average leased selling square footage
1,455
1,299
1,429
1,292
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Three Months Ended August 3, 2024 Compared to Three Months Ended July 29, 2023
THREE MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
RH SEGMENT
WATERWORKS
TOTAL (1)
RH SEGMENT
WATERWORKS
TOTAL (1)
(in thousands)
Net revenues (2)
$
780,925
$
48,730
$
829,655
$
753,550
$
46,929
$
800,479
Cost of goods sold
432,301
22,597
454,898
399,125
21,281
420,406
Gross profit
348,624
26,133
374,757
354,425
25,648
380,073
Selling, general and administrative expenses
258,958
19,672
278,630
211,080
17,653
228,733
Income from operations
$
89,666
$
6,461
$
96,127
$
143,345
$
7,995
$
151,340
(1) The results for the Real Estate segment were immaterial in both the three months ended August 3, 2024 and July 29, 2023, thus, such results are presented within the RH Segment in each period. Refer to Note 17— Segment Reporting in our condensed consolidated financial statements.
(2) RH Segment net revenues include outlet revenues of $64 million and $59 million for the three months ended August 3, 2024 and July 29, 2023, respectively.
Net revenues
Consolidated net revenues increased $29 million, or 3.6%, to $830 million in the three months ended August 3, 2024 compared to $800 million in the three months ended July 29, 2023.
RH Segment net revenues
RH Segment net revenues increased $27 million, or 3.6%, to $781 million in the three months ended August 3, 2024 compared to $754 million in the three months ended July 29, 2023. The below discussion highlights several significant factors that impacted RH Segment net revenues, which are listed in order of magnitude.
RH Segment net revenues for the three months ended August 3, 2024 increased primarily due to higher revenue in our core business, driven by the introduction of new collections and the mailings of our RH Interiors and RH Modern Sourcebooks, and higher Contract revenue driven by an increase in completed projects. We also recognized higher hospitality revenue, due to new Gallery openings, including RH England, RH Indianapolis, RH Cleveland and RH Palo Alto, and higher outlet revenue.
Waterworks net revenues
Waterworks net revenues increased $1.8 million, or 3.8%, to $49 million in the three months ended August 3, 2024 compared to $47 million in the three months ended July 29, 2023.
Gross profit
Consolidated gross profit decreased $5.3 million, or 1.4%, to $375 million in the three months ended August 3, 2024 compared to $380 million in the three months ended July 29, 2023. As a percentage of net revenues, consolidated gross margin decreased 230 basis points to 45.2% of net revenues in the three months ended August 3, 2024 from 47.5% of net revenues in the three months ended July 29, 2023.
RH Segment gross profit
RH Segment gross profit decreased $5.8 million, or 1.6%, to $349 million in the three months ended August 3, 2024 compared to $354 million in the three months ended July 29, 2023. As a percentage of net revenues, RH Segment gross margin decreased 240 basis points to 44.6% of net revenues in the three months ended August 3, 2024 from 47.0% of net revenues in the three months ended July 29, 2023. The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the core business driven by price adjustments, as well as a higher mix of, and discounts on, discontinued products. RH Segment experienced deleverage in occupancy costs year over year due to higher expenses related to our Galleries and supply chain in support of the continued global expansion in Europe.
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Waterworks gross profit
Waterworks gross profit was $26 million in both the three months ended August 3, 2024 and July 29, 2023. As a percentage of net revenues, Waterworks gross margin decreased 110 basis points to 53.6% of net revenues in the three months ended August 3, 2024 from 54.7% of net revenues in the three months ended July 29, 2023.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $50 million, or 21.8%, to $279 million in the three months ended August 3, 2024 compared to $229 million in the three months ended July 29, 2023.
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $48 million, or 22.7%, to $259 million in the three months ended August 3, 2024 compared to $211 million in the three months ended July 29, 2023.
RH Segment selling, general and administrative expenses for the three months ended August 3, 2024 include amortization of non-cash compensation of $0.9 million related to an option grant made to Mr. Friedman in October 2020.
RH Segment selling, general and administrative expenses for the three months ended July 29, 2023 include legal settlements of $8.0 million and non-cash compensation of $2.0 million related to an option grant made to Mr. Friedman in October 2020.
RH Segment selling, general and administrative expenses would have been 33.0% and 26.6% of net revenues for the three months ended August 3, 2024 and July 29, 2023, respectively, excluding the costs incurred in connection with the adjustments mentioned above. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by incremental advertising costs of $33 million related to the mailings of the Spring 2024 RH Modern and Summer 2024 RH Interiors Sourcebooks as compared to limited mailings in the second quarter of 2023. Additionally, compensation and occupancy costs were higher year over year .
Waterworks selling, general and administrative expenses
Waterworks selling, general and administrative expenses increased $2.0 million, or 11.4%, to $20 million in the three months ended August 3, 2024 compared to $18 million in the three months ended July 29, 2023. Waterworks selling, general and administrative expenses were 40.4% and 37.6% of net revenues for the three months ended August 3, 2024 and July 29, 2023, respectively.
Interest expense—net
Interest expense—net increased $15 million, or 33.4%, in the three months ended August 3, 2024 compared to the three months ended July 29, 2023, which consisted of the following in each period:
THREE MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Term loan interest expense
$
52,899
$
50,435
Finance lease interest expense
7,922
8,794
Other interest expense
1,118
1,198
Capitalized interest for capital projects
(1,826)
(1,264)
Interest income
(851)
(14,741)
Total interest expense—net
$
59,262
$
44,422
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Other income—net
Other income—net consisted of the following in each period:
THREE MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Foreign exchange from transactions (1)
$
190
$
372
Foreign exchange from remeasurement of intercompany loans (2)
(853)
(558)
Other income—net
$
(663)
$
(186)
(1) Represents net foreign exchange gains and losses related to exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S. dollar as compared to the euro and pound sterling.
(2) Represents remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom.
Income tax expense
THREE MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(dollars in thousands)
Income tax expense
$
3,717
$
27,245
Effective tax rate
11.4
%
26.3
%
The decrease in our effective tax rate for the three months ended August 3, 2024 compared to the three months ended July 29, 2023 is primarily attributable to higher net excess tax benefits from stock-based compensation year over year.
Six Months Ended August 3, 2024 Compared to Six Months Ended July 29, 2023
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
RH SEGMENT
WATERWORKS
TOTAL (1)
RH SEGMENT
WATERWORKS
TOTAL (1)
(in thousands)
Net revenues (2)
$
1,457,991
$
98,624
$
1,556,615
$
1,444,066
$
95,575
$
1,539,641
Cost of goods sold
819,559
46,261
865,820
768,057
43,966
812,023
Gross profit
638,432
52,363
690,795
676,009
51,609
727,618
Selling, general and administrative expenses
503,107
36,898
540,005
440,095
36,943
477,038
Income from operations
$
135,325
$
15,465
$
150,790
$
235,914
$
14,666
$
250,580
(1) The results for the Real Estate segment were immaterial in both the six months ended August 3, 2024 and July 29, 2023, thus, such results are presented within the RH Segment in each period. Refer to Note 17— Segment Reporting in our condensed consolidated financial statements.
(2) RH Segment net revenues include outlet revenues of $126 million and $116 million for the six months ended August 3, 2024 and July 29, 2023, respectively.
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Net revenues
Consolidated net revenues increased $17 million, or 1.1%, to $1,557 million in the six months ended August 3, 2024 compared to $1,540 million in the six months ended July 29, 2023.
RH Segment net revenues
RH Segment net revenues increased $14 million, or 1.0%, to $1,458 million in the six months ended August 3, 2024 compared to $1,444 million in the six months ended July 29, 2023. The below discussion highlights several significant factors that impacted RH Segment net revenues, which are listed in order of magnitude.
RH Segment net revenues for the six months ended August 3, 2024 increased primarily due to increased outlet revenue, increased hospitality revenue as a result of new Gallery openings, including RH England, RH Indianapolis, RH Cleveland and RH Palo Alto, as well as a slight increase in the combined core and Contract businesses due to the introduction of new collections, the mailings of our RH Interiors and RH Modern Sourcebooks and an increase in completed projects.
Waterworks net revenues
Waterworks net revenues increased $3.0 million, or 3.2%, to $99 million in the six months ended August 3, 2024 compared to $96 million in the six months ended July 29, 2023.
Gross profit
Consolidated gross profit decreased $37 million, or 5.1%, to $691 million in the six months ended August 3, 2024 compared to $728 million in the six months ended July 29, 2023. As a percentage of net revenues, consolidated gross margin decreased 290 basis points to 44.4% of net revenues in the six months ended August 3, 2024 from 47.3% of net revenues in the six months ended July 29, 2023.
RH Segment gross profit
RH Segment gross profit decreased $38 million, or 5.6%, to $638 million in the six months ended August 3, 2024 from $676 million in the six months ended July 29, 2023. As a percentage of net revenues, RH Segment gross margin decreased 300 basis points to 43.8% of net revenues in the six months ended August 3, 2024 from 46.8% of net revenues in the six months ended July 29, 2023. The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the core business driven by price adjustments, as well as a higher mix of, and discounts on, discontinued products. RH Segment experienced deleverage in occupancy costs year over year due to higher expense related to our Galleries and supply chain in support of the continued global expansion in Europe.
Waterworks gross profit
Waterworks gross profit was $52 million in both the six months ended August 3, 2024 and July 29, 2023. As a percentage of net revenues, Waterworks gross margin decreased 90 basis points to 53.1% of net revenues in the six months ended August 3, 2024 from 54.0% of net revenues in the six months ended July 29, 2023.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $63 million, or 13.2%, to $540 million in the six months ended August 3, 2024 compared to $477 million in the six months ended July 29, 2023.
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $63 million, or 14.3%, to $503 million in the six months ended August 3, 2024 compared to $440 million in the six months ended July 29, 2023.
RH Segment selling, general and administrative expenses for the six months ended August 3, 2024 include favorable net legal settlements of $6.2 million and non-cash compensation of $2.8 million related to an option grant made to Mr. Friedman in October 2020.
RH Segment selling, general and administrative expenses for the six months ended July 29, 2023 include legal settlements of $8.0 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million and non-cash compensation of $5.6 million related to an option grant made to Mr. Friedman in October 2020.
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RH Segment selling, general and administrative expenses would have been 34.7% and 29.0% of net revenues for the six months ended August 3, 2024 and July 29, 2023, respectively, excluding the costs incurred in connection with the adjustments mentioned above. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by incremental advertising costs of $48 million related to the increased circulation in connection with the mailing of the RH Outdoor Sourcebook in fiscal 2024, and mailings of the Spring 2024 RH Modern and Summer 2024 RH Interiors Sourcebooks with no comparative mailings in fiscal 2023. Additionally, compensation and occupancy costs were higher year over year.
Waterworks selling, general and administrative expenses
Waterworks selling, general and administrative expenses was $37 million in both the six months ended August 3, 2024 and July 29, 2023. Waterworks selling, general and administrative expenses were 37.4% and 38.7% of net revenues for the six months ended August 3, 2024 and July 29, 2023, respectively.
Waterworks selling, general and administrative expenses in the six months ended August 3, 2024 include $3.2 million related to a favorable legal settlement. Excluding the adjustment for the legal settlement, Waterworks selling, general and administrative expenses would have been 40.7% and 38.7% of net revenues for the six months ended August 3, 2024 and July 29, 2023, respectively.
Interest expense—net
Interest expense—net increased $32 million, or 37.7%, in the six months ended August 3, 2024 compared to the six months ended July 29, 2023, which consisted of the following in each period:
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Term loan interest expense
$
104,843
$
98,228
Finance lease interest expense
15,329
17,280
Other interest expense
2,231
2,414
Capitalized interest for capital projects
(4,452)
(2,319)
Interest income
(1,917)
(31,365)
Total interest expense—net
$
116,034
$
84,238
Other (income) expense—net
Other (income) expense—net consisted of the following in each period:
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Foreign exchange from transactions (1)
$
1,138
$
1,475
Foreign exchange from remeasurement of intercompany loans (2)
(636)
(2,314)
Other (income) expense—net
$
502
$
(839)
(1) Represents net foreign exchange gains and losses related to exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S. dollar as compared to the euro and pound sterling.
(2) Represents remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom.
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Income tax expense
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(dollars in thousands)
Income tax expense
$
1,626
$
43,830
Effective tax rate
6.0
%
27.0
%
The decrease in our effective tax rate for the six months ended August 3, 2024 compared to the six months ended July 29, 2023 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation year over year.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement.
A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table:
AUGUST 3,
FEBRUARY 3,
2024
2024
(in thousands)
Asset based credit facility
$
25,000
$
—
Term loan B (1)
1,945,000
1,955,000
Term loan B-2 (1)
491,250
493,750
Convertible senior notes due 2024 (1)
41,904
41,904
Notes payable for share repurchases
315
315
Total debt
$
2,503,469
$
2,490,969
Cash and cash equivalents
(78,333)
(123,688)
Total net debt (2)
$
2,425,136
$
2,367,281
Availability under the asset based credit facility—net (3)
$
498,565
$
447,693
(1) Amounts exclude discounts upon original issuance and third party offering and debt issuance cost.
(2) Net debt as of both August 3, 2024 and February 3, 2024 excludes non-recourse real estate loans of $18 million as of both periods related to our consolidated variable interest entities from our joint venture activities. These real estate loans are secured by the assets of such entities and the associated creditors do not have recourse against RH’s general assets. Refer to Note 5— Variable Interest Entities in our condensed consolidated financial statements.
(3) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $45 million in outstanding letters of credit as of both August 3, 2024 and February 3, 2024.
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General
The primary cash needs of our business have historically been for merchandise inventories, payroll, rent for our retail and outlet locations, capital expenditures associated with opening new locations, updating existing locations, as well as the development of our infrastructure and information technology, and Sourcebooks. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. During fiscal 2023, we invested $1,253 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program. We continuously evaluate our capital allocation strategy and may engage in future investments in connection with existing or new share repurchase programs (refer to “Share Repurchase Program” below), which may include investments in derivatives or other equity linked instruments. We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Capital raised from debt financing arrangements has enabled us to pursue various investments, including our investments in joint ventures. We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business .
We believe our capital structure provides us with substantial optionality regarding capital allocation. Our near-term decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors affecting business conditions, such as trends in luxury housing, increases in interest rates, equity market performance and inflation. We believe our existing cash balances and operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements and fulfill other capital needs for more than the next 12 months .
While we do not anticipate that we will require additional debt to fund our operations, our goal is to continue to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations. We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, entry into various credit agreements and other new debt financing arrangements that present attractive terms. We expect to continue to use additional sources of debt financing in future periods as a source of additional capital to fund our various investments .
To the extent we choose to secure additional sources of liquidity through incremental debt financing, there can be no assurances that we will be able to raise such financing on favorable terms, if at all, or that future financing requirements will not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock. Any adverse developments in the U.S. or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt. In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments, including the repayment of the principal amount of our convertible senior notes in cash, whether upon stated maturity, early conversion or otherwise of such convertible senior notes. To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations, including triggering cross defaults or other consequences with respect to other indebtedness. Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations. Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks .
Credit Facilities and Debt Arrangements
We amended and restated the ABL Credit Agreement in July 2021, which provides an asset based credit facility with an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. The accordion feature may be added as a first-in, last-out term loan facility. The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the ABL Credit Agreement are met. The maturity date of the asset based credit facility is July 29, 2026 . As of August 3, 2024, we had $25 million outstanding under the asset based credit facility, which increased to $110 million as of September 6, 2024. The additional borrowings support our continued investments, including into inventory of new collections and existing collections, as well as capital expenditures for our Design Gallery expansion.
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We entered into a $2,000 million term debt financing in October 2021 (the “Term Loan B”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A. as administrative agent and collateral agent, and the various lenders party thereto (the “Term Loan Credit Agreement”). Term Loan B has a maturity date of October 20, 2028. As of August 3, 2024, we had $1,945 million outstanding under the Term Loan Credit Agreement. We are required to make quarterly principal payments of $5.0 million with respect to Term Loan B.
In May 2022, we entered into an incremental term debt financing (the “ Term Loan B-2”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A. as administrative agent and the various lenders parties thereto (the “Amended Term Loan Credit Agreement”). Term Loan B-2 has a maturity date of October 20, 2028. Term Loan B-2 constitutes a separate class from the existing Term Loan B under the Term Loan Credit Agreement. As of August 3, 2024, we had $491 million outstanding under the Amended Term Loan Credit Agreement. We are required to make quarterly principal payments of $1.3 million with respect to Term Loan B-2.
Convertible Senior Notes
In September 2019, we issued in a private offering $350 million principal amount of 0.00% convertible senior notes due 2024 (the “2024 Notes,” the “Convertible Senior Notes” or the “Notes”).
As of August 3, 2024, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024. We anticipate borrowing additional funds under the asset based credit facility to repay the principal amount of the 2024 Notes in cash with respect to any convertible notes for which the holders elect early conversion (if applicable), as well as upon maturity of the 2024 Notes in September 2024.
Capital
We have invested significant capital expenditures in developing and opening new Design Galleries, and these capital expenditures have increased in the past, and may continue to increase in future periods, as we open additional Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received during the construction period. During the six months ended August 3, 2024, adjusted capital expenditures were $133 million in aggregate, net of cash received related to landlord tenant allowances of $7.7 million. We anticipate our adjusted capital expenditures to be $250 million to $300 million in fiscal 2024, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments. Nevertheless, we may elect to pursue additional capital expenditures beyond those that are anticipated during any given fiscal period inasmuch as our strategy is to be opportunistic with respect to our investments and we may choose to pursue certain capital transactions based on the availability and timing of unique opportunities. There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and higher interest rates, and we may make adjustments to our allocation of capital in fiscal 2024 or beyond in response to these changing or other circumstances. We may also invest in other uses of our liquidity such as share repurchases, acquisitions and growth initiatives, including through joint ventures and real estate investments.
Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us. As we develop new Galleries, as well as other potential strategic initiatives in the future like our integrated hospitality experience, we are exploring other models for our real estate activities, which include different terms and conditions for real estate transactions. These transactions may involve longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings that we wish to develop for new Gallery locations or other aspects of our business. These approaches might require different levels of capital investment on our part than a traditional store lease with a landlord. We have also begun executing changes in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the ultimate objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent. For example, we have entered into arrangements with a third-party development partner to develop real estate for future RH Design Galleries. In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurance that we will be successful in securing additional funding on attractive terms or at all. In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we may pursue.
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Cash Flow Analysis
A summary of operating, investing, and financing activities is set forth in the following table:
SIX MONTHS ENDED
AUGUST 3,
JULY 29,
2024
2023
(in thousands)
Net cash provided by operating activities
$
67,306
$
248,355
Net cash used in investing activities
(124,763)
(115,323)
Net cash provided by (used in) financing activities
11,862
(1,224,481)
Net decrease in cash and cash equivalents and restricted cash
(45,355)
(1,091,178)
Cash and cash equivalents and restricted cash at end of period
78,333
420,585
Net Cash Provided by Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, impairments, stock-based compensation and the effect of changes in working capital and other activities.
For the six months ended August 3, 2024, net cash provided by operating activities was $67 million and consisted of net income of $25 million and an increase in non-cash items of $161 million, partially offset by a change in working capital and other activities of $119 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $163 million, a decrease in operating lease liabilities of $48 million, a decrease in other current and non-current liabilities of $28 million, an increase in landlord assets under construction, net of tenant allowances, of $17 million and an increase in accounts receivable of $12 million. These uses of cash from working capital were partially offset by an increase of accounts payable and accrued expenses of $123 million, an increase of deferred revenue and customer deposits of $20 million and a decrease in prepaid expense and other assets of $6.2 million.
Net Cash Used in Investing Activities
Investing activities consist primarily of investments in capital expenditures related to investments in retail stores, information technology and systems infrastructure, as well as supply chain investments. Investing activities also include our strategic investments.
For the six months ended August 3, 2024, net cash used in investing activities was $125 million and was comprised of investments in retail stores, information technology and systems infrastructure of $115 million and additional contributions to our equity method investments of $9.4 million.
Net Cash Provided by (Used in) Financing Activities
Financing activities consist primarily of borrowings and repayments related to convertible senior notes, credit facilities and other financing arrangements, and cash used in connection with such financing activities include investments in our share repurchase program, repayment of indebtedness, including principal payments under finance lease agreements and other equity related transactions.
For the six months ended August 3, 2024, net cash provided by financing activities was $12 million, primarily due to proceeds from borrowings under the asset based credit facility of $25 million and proceeds from the exercise of stock options of $11 million. These cash inflows were partially offset by payments on term loans of $13 million and net payments under finance lease agreements of $12 million.
Non-Cash Transactions
Non-cash transactions consist of non-cash additions of property and equipment and landlord assets under construction. In addition, non-cash transactions consist of excise tax from share repurchases included in accounts payable and accrued expenses at period-end.
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Cash Requirements from Contractual Obligations
Leases
We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space. Refer to Note 8— Leases in our condensed consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.
Most lease arrangements provide us with the option to renew the leases at defined terms. The table presenting the maturities of our lease liabilities included in Note 8— Leases in our condensed consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases.
Convertible Senior Notes
Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements for further information on the 2024 Notes.
Asset Based Credit Facility
Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.
Term Loan
Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our Term Loan.
Real Estate Loans
Refer to Note 5— Variable Interest Entities in our condensed consolidated financial statements for further information on the real estate loans held as part of our joint ventures with a third-party development partner.
Share Repurchase Program
We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase program, including, among others, current cash needs, capacity for leverage, cost of borrowings, results of operations and the market price of our common stock. We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our stockholders. We may undertake other repurchase programs in the future with respect to our securities. Starting on January 1, 2023, share repurchases under our Share Repurchase Program (as defined below) are subject to a 1% excise tax imposed under the Inflation Reduction Act.
Share Repurchase Program
In 2018, our Board of Directors authorized a share repurchase program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases, including through privately negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives. On June 2, 2022, the Board of Directors authorized an additional $2,000 million for the purchase of shares of our outstanding common stock, which increased the total authorized size of the share repurchase program to $2,450 million (the “Share Repurchase Program”).
We did not repurchase any shares of our common stock under the Share Repurchase Program during the six months ended August 3, 2024. As of August 3, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program.
48 | 2024 SECOND QUARTER FORM 10-Q
PART I. FINANCIAL INFORMATION
Table of Contents
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires senior leadership to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to our condensed consolidated financial statements.
We evaluate the development and selection of our critical accounting policies and estimates and believe that certain of our significant accounting policies involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, and are therefore discussed as critical:
Merchandise Inventories—Reserves
Lease Accounting
Reasonably Certain Lease Term
Incremental Borrowing Rate
Fair Value
Stock-Based Compensation—Performance-Based Awards
Variable Interest Entities
There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in the 2023 Form 10-K. For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the 2023 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 2— Recently Issued Accounting Standards in our condensed consolidated financial statements for a description of recently issued accounting standards that may impact our results in future reporting periods.
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